Updated: February 2, 2024
When considering marital trusts as part of their estate plan the first decision married couples need to make is whether or not a trust is necessary. The 100% marital deduction rule allows you to give your spouse any amount in either your will or a trust estate tax free. This also applies if your children are minors.
Since there is no limit on what you can leave your spouse without worrying about estate taxes, a marital trust is not needed if all you want to do is leave all your assets to your spouse. A will is easier and less expensive.
While there are other advantages to using trusts over a will, such as avoiding the probate process, protection from creditors, and “stepped-up” assets — meaning the value of inherited assets, such as property, stocks, or bonds, is re-adjusted to its current market value, not the value when initially purchased, you will need to decide based on your own situation.
When it comes to how and what your children and spouse inherit, there may be some differences between a trust and a will that may help you decide. The primary differences are the cost and time involved.
If this is your first marriage with shared children, your children may not receive any inheritance until after your spouse has died.
If you elect to leave assets directly to your children.
Once you have taken care of your children, you can proceed to make decisions about how to take care of their biological parent and/or stepparent. It’s more complicated, since there are many options to consider and you need to choose the option that is best for your situation and requirements.
You can elect to transfer the remaining marital assets to a trust for your surviving spouse’s benefit or you could elect to give part of your estate directly to your spouse in your will. Since all property left or gifted to your surviving spouse is inherited free of estate tax (I.R.C. § 2056(a)), estate tax limits are not a consideration in choosing between the two and other factors come into play.
When you elect to leave the remainder of your estate to your spouse in your will, you have lost any control over those assets. Your spouse would be free of any restrictions placed on them by the instructions in a trust, such as fixed allotments and trustee approval.
Other things to consider when you leave assets to your surviving spouse in your will.
These and other reasons may make them extremely vulnerable to bad financial skills and advice, scammers, or influence by other family members or subsequent spouses with their own interests in mind.
Although there are no estate tax limit considerations, there are many other things to consider when choosing the type of trust you want for your spouse. These are only generalizations and you will want to individualize the trust for your circumstances and wishes.
Unless you choose a Personal Marital trust, a Qualified Terminable Interest Property Trust trust, or have no children, your spouse’s trust is usually funded after you have funded the children’s trust. Once you have created and funded a separate trust for your children, you may be less concerned about how your surviving spouse uses that trust, giving you more options.
While a couple may have two individual living trusts with the other spouse as beneficiary and their children as contingent beneficiaries, marital trusts are specifically tailored for married couples. They may be referred to as a family trust, but marital trusts are another type of family trust. Once you decide on using marital trusts there are many considerations, most of which should be handled by a professional.
Trusts for married couples can only be created for spouses who are United States citizens with combined marital assets, whether jointly owned or not. The legal definition of spouse may vary from state to state, so it may or may not be available to domestic partners or couples in civil unions (New Jersey, Illinois, Hawaii, and Colorado only). For a noncitizen spouse, you can create a Qualified Domestic Trust (QDOT).
Most married couples use trusts for estate tax purposes.
Trusts are necessary if your total estate will be over the federal (in 2024 – $13,610,000 for individual and $27,220,000 for combined trusts) and/or any state estate tax exemption limit (may be as low as $1,000,000) when transferred to your heirs.
If estate tax is not a concern, the primary reason for trusts are for the benefit of your children
Trusts allow you to put aside a certain amount of income tax-free money or other assets for your descendants or adopted children that becomes available for them after your death, but not to your spouse.
A trust would be more beneficial to your children if both spouses/parents die at the same time.
Marital trusts are also created to provide for your surviving spouse
After you have taken care of your children’s needs, the remainder of your assets can be used to support your surviving spouse.
You may choose to use the trust to limit the amount of assets available to them, especially if they are not financially responsible or are not a parent of your children.
Trusts that involve spouses are subject to the portability of the estate tax exemption, and the federal estate tax exemption is transferable between them.
Estate taxes are only assessed on assets transferred to your adult heirs.
Since Gift taxes are tied into the federal estate tax, they will be reduced as well.
There are two types of situations for a marital trust based on the ultimate beneficiary and whether or not your surviving spouse is the trustee
1. Personal Marital Trusts — Your spouse is the only beneficiary
Simple Trust – Your spouse is the trustee
This trust is typically created in your will. Although your surviving spouse may not feel obligated to follow instructions in the trust, the probate court continues to oversee any trust created in a will to make sure it is being handled properly until it expires.
The trust can either be revocable, such as the A trust from the split of an A-B or ABC trust, or irrevocable if desired for other marital trust options.
Bare Trust –Your spouse is not the trustee
This trust is irrevocable and a trustee will manage the trust to provide for your surviving spouse according to your instructions and guidance.
2. Bypass Marital Trusts – Your children are the beneficiary of the trust
Your spouse is the trustee.
This trust is typically created in your will and can either be revocable or irrevocable.
Your spouse is not the trustee but is entitled to benefits from the trust.
This is the equivalent of a Qualified Terminable Interest Property (QTIP) Trust with a few differences. Spouses are not restricted to fixed allotments and can access the interest/earning of the trust at any time.
If you would like your spouse to have more income, you can instruct the trustee to access the principal in the trust fund for your spouse. There are a few drawbacks to this.
Your spouse is not the trustee and is not entitled to benefits from the trust.
This is an irrevocable credit shelter trust created with marital assets for just your heirs.
Also called the decedent’s trust, it allows assets you want your children to receive to bypass your spouse and have ownership go to your children estate tax free upon your spouse’s death. This ensures your descendants receive their inheritance by removing assets from your surviving spouse’s control.
Trusts for married couples can either be a single trust or a combination of trusts
Some will be created while you are alive (living trust) or after your death (testamentary trust). If irrevocable, these trusts are considered a separate taxpayer and require its own tax return, Form 1041.
Understanding the different choices of trusts for married couples can be confusing since the terms marital trust, bypass trust, credit shelter trust, and QTIP trust are all used in different contexts in many references. When used in the context of trusts for married couples:
There are four options when married couples are trying to create a plan for your estate that provides for the surviving spouse and your children.
Type of Trust
When Ownership is Transferred to Heirs
Total Estate 2024 Tax Exemption Limit for Adult Heirs
A single Qualified Terminable Interest Property (QTIP) Trust
Your surviving spouse’s death
A-B or ABC living trust, which splits at your death into a bypass and marital trust
Your surviving spouse’s death
A simple bypass trust for your children and leaving your surviving spouse assets in your will
$13,610,000, unless your spouse creates a trust with their inherited assets
QTIP trusts, two types of marital trusts, and trusts for your heirs are considered bypass trusts because ownership bypasses your surviving spouse and goes to your children. This will protect those assets from being given by your surviving spouse to new spouses, stepchildren, etc. without permission of the trustee.
QTIP, simple bypass, and all irrevocable marital trusts have many features in common with other trusts and each other. These trusts will:
The Qualified Terminable Interest Property (QTIP) Trust is the most common method of creating a marital trust, especially for second marriages. It is an irrevocable testamentary trust that both provides for your surviving spouse, as long as she is a US citizen, as the lifetime beneficiary while limiting access to the entire estate to protect the remaining assets for your children. Your spouse is the sole initial beneficiary while your children are remainder beneficiaries and will inherit after your spouse dies and the trust ends. A QTIP trust works with both jointly and individually owned assets. The QTIP can be a combined trust or each spouse can create one with their individual assets.
The assets in the QTIP are for the benefit of your surviving spouse therefore protected by the 100% or unlimited marital deduction rule allowing transfer of your entire estate without tax.
This means that all of the estate placed in the trust after your death is not taxable until your surviving spouse dies (Section 2056 of the Internal Revenue Code).
Your surviving spouse is entitled to any income specified in the trust for the rest of their life, otherwise known as a life estate.
The income is given in fixed allocations and is usually based on the expected earnings/interest income of the trust.
Allocations must be given at least yearly and are fixed for the duration of the trust. There are two common means of determining your spouse’s yearly income.
You may give them the option to use some of the principal under specific circumstances such as the need to fund certain medical, educational, or maintenance expenses.
Your surviving spouse can require the trustee to convert non-income generating principal into profitable property.
Your children will be named as the final/remainder beneficiaries for when your surviving spouse dies. This will happen whether your surviving spouse is a biologic parent or stepparent.
Since there are two trust owners, the total estate tax exclusion is doubled. In addition, the estate tax limits are portable between spouses and any amount below the current limit ($13,610,000 in 2024) can be claimed by the spouse for the QTIP trust and added to their limit when they pass away and leave the trust to your heirs.
Example of how portability works.
This will not happen automatically; it needs to be claimed by making an “election” on your estate tax return.
See the Estate Tax section for details of making an election on an estate tax return.
A trustee will manage the trust for both your surviving spouse’s benefit and to preserve the estate for your children’s benefit.
The two dividing trusts are the A-B and ABC trusts. They are only useful if each of you has individual assets and does not work with jointly owned assets. Any joint assets would all go to your surviving spouse even with one of these trusts.
The A-B trust is a joint trust created by a married couple where each names suitable beneficiaries other than their spouse. Upon your death, an A-B trust will split into two living trusts: an irrevocable B or bypass trust for your heirs, and a revocable A or personal trust for your spouse. The A trust differs from a QTIP trust because it is revocable and your surviving spouse can manage the trust.
Your and your spouse’s remaining individual assets are transferred to the A trust which can only be used for your surviving spouse’s benefit.
The B trust is an irrevocable credit shelter trust created with marital assets usually for your heirs, but could also be used to benefit your surviving spouse by allowing them to access property or draw income. The B trust can’t be altered by your surviving spouse, although they can manage and use the trust as the trustee if designated in the trust document.
If your assets in the A-B trust are between the estate tax limit and twice the limit, you can:
The ABC Trust trust, also known as “gap trust planning” trust, is a joint trust created by a married couple. You may consider this when you are getting close to twice the estate tax exemption. Upon your death an ABC trust will split into three trusts.
The A created for your surviving spouse’s benefit is similar to the A trust from an A-B trust.
Trust B is similar to the B trust from an A-B trust and will only include assets for your heirs up to the amount of the federal and/or state estate tax exemption limits.
Trust C is irrevocable and will contain your additional assets.
This is usually called a marital trust because it describes the inheritance of combined marital assets after you die, but it is actually the combination of two trusts. Instead of a living A-B or ABC trust that automatically creates two irrevocable trusts after your death, a bypass trust for your children and marital/personal trust for your surviving spouse are created in your will.
Since there are two trusts and both spouses are entitled to the federal limit, you will also be able to protect at least twice the federal estate tax limit, $27,220,000 in 2024.
Although not a combination of two trusts, dividing the marital assets by creating a bypass trust for your children and leaving the remainder to your spouse in your will is considered a form of marital trust. Your adult children could inherit up to the limit in the year of your death without estate tax, unless your spouse creates a trust with their inherited assets that allows them to inherit an additional amount up to the limit in the year of their death without estate tax.
The Totten Trust is technically a revocable living trust, but is actually a type of payable-on-death account allowed in many states. You can easily set one up without a formal written document. However, it can be established as a formal trust by simply naming a beneficiary on the title document for the account using language such as “In Trust For,” “Payable on Death To” or “As Trustee For.” See the Payable on Death section for more detail.
A Spousal Lifetime Access Trust (SLAT) is very different from the other marital trusts discussed above.